The Community Reinvestment Act (CRA) is as important and successful as it is simple: Banks that operate with taxpayer-funded support must reinvest in the communities they serve--that is, their markets. CRA has motivated hundreds of billions of new financing dollars into disinvested communities, particularly communities of color, according to the National Community Reinvestment Coalition (NCRC).
Congress intended CRA, which took effect in 1978, as an antidote to redlining, the federally backed practice that guided lenders not to lend in communities of color. Originating in the National Mortgage Act of 1934, redlining referred to marking maps in red to warn mortgage lenders of what were unfairly considered unworthy credit markets--not coincidentally and most often African American neighborhoods. Most banks recognized the wink and nod, and redlining came to define discriminatory lending practices.
For its first 30 years or so, up to the start of the Great Recession, CRA significantly influenced bank commitments to their customers and communities, with the brass ring of an "outstanding CRA rating incenting innovation, dedication, and service." For banks, this was an important seal of good standing.
The rise of predatory mortgage lending that led to the Great Recession is, in retrospect, evidence of CRA's shortcomings. Too many banks turned to non-bank lenders that were not accountable under CRA to make mortgage loans that they knew, or should have known, were not going to be repaid. (See "The Big Short" or any other chronicle of the practice.) In addition, the worst of the predatory lenders targeted African American and Latino homeowners, stealing their wealth in a practice sometimes called "reverse redlining."
When bank regulators, among others, realized in 2008 and 2009 that the banking system might not survive the fallout of the financial services collapse, CRA pretty much came off the table. It was a matter of bank survival. CRA would have to wait.
With economic and financial recovery, however, the early sprouts from the fallow CRA fields suggest that CRA is not coming back in ways it must to fulfill Congressional purpose, for several reasons:
- Regulators (in the form of the Federal Financial Institutions Examination Council, or FFIEC) have indicated that any bank that had a hand in or near predatory lending is probably not going to get an "outstanding" rating anytime soon. In that case, bank executives could think, why bother trying? The "outstanding" rating (in contrast to a "satisfactory" rating) is what drove banks to try harder, extend further, and reach deeper.
- CRA bank examiners face an experience and knowledge gap. While CRA lay fallow, examiners with deep CRA expertise and experience moved on. Many new examiners lack the expertise and experience to do their job as well as they would like to. Some of the bank regulators are working aggressively to rebuild that capacity.
- CRA covers a diminishing portion of bank activities. CRA is predicated on banks taking deposits, which was their primary business activity in 1978. Estimates are that close to two-thirds of Americans' savings were in banks then; today the number seems to be less than 20%.
Some of the erosion of CRA comes from other sources. In 1995, the bank regulators (then four, now three) issued revised CRA regulations to make the law work better for communities, particularly communities of color, and banks.
This chart, from OFN"s recently published 20-year longitudinal study, shows the dramatic impact the 1995 regulations had on bank lending to Community Development Financial Institutions (CDFIs), private financial institutions dedicated to serving disinvested communities.
Banks quickly became the fastest-growing and most important source of lending to CDFIs that, in turn, pooled that money with money from other sources, such as faith-based and impact-motivated investors, to lend for housing, small businesses, and other vital needs in communities that otherwise did not have reasonable access.
Very quietly, however, CRA experienced what is known as mission drift. Its uses veered from anti-redlining and increasingly encouraged other types of financing and investing, such as building golf courses, delivering student loans (though most students qualify as low-income, not all were systemically excluded from wealth creation due to race), and other purposes.
More recently, the rise of "impact investing"--an all-encompassing term representing financing of many types for many purposes that the investors intend to produce good social benefits--has further diluted CRA. Whatever the merits of impact investing, and there are many, it gives investors concerned about their reputation an option that is, frankly, more financially desirable than the type of activities Congress intended. For example, CDFIs usually borrow on concessionary rates and terms, providing an implicit source of subsidy to communities that benefit from it. A legend in the banking industry once said, "Money goes where it's wanted and stays where it's well treated."
If a bank, or any other investor, can get the same reputational bump from market-rate, liquid investments, most will take it. And that's understandable. But that doesn't account for the difference between what we consider valuable impact investing and essential high-impact investing.
The result of all these factors is that financing and financial services for disinvested neighborhoods--particularly African American and Latino communities--is declining. In the chart above, you can see the trend line plateauing and starting to decline, and that is 2013. I am certain that more current data will show that trend continuing.
There is a reason that John Taylor, the President & CEO of NCRC and our nation's leading CRA advocate, warns that 98% of banks got at least "satisfactory" ratings on their most recent exams while the people and communities he represents are struggling and suffering. We need to re-focus regulatory policies and practices, bank activities, and public priorities on high-impact investing.